What is the definition of working capital?

Working capital is defined as the measurement of liquid assets available for daily operations of a business. It is a financial metric that assesses the short-term liquidity and operational efficiency of a company. Working capital is essential for a company to meet its short-term liabilities and day-to-day operational costs, including payroll, inventory purchases, and other expenses that arise in the course of running the business.

The calculation of working capital typically involves subtracting current liabilities from current assets, which means it focuses on the resources that can easily be converted to cash or are expected to be liquidated or used up within a year. This liquidity is crucial for maintaining business operations and ensuring that a company can cover its obligations without facing financial distress.

Other choices do not accurately define working capital. For instance, total liabilities minus assets would lead to a figure representing net worth or equity, which is not the essence of working capital. Current assets only represent half of the necessary context—working capital involves both current assets and current liabilities. Lastly, total revenues minus expenses reflects a measure of profitability, not liquidity or the ability to fund day-to-day operations. Thus, defining working capital in terms of liquid assets available for daily operations captures its essence and practical importance in business finance.